View: For its own political safety, if not for India’s economy, GoI must fully open the expenditure tap

​​In politics, as in business, the biggest risk could well be not taking one; why is GoI so afraid to spend?

The answers are with the government that should be ready to spend, sooner than later — simply because no political party would like to be remembered as a prisoner of rigid beliefs.

At first, New Delhi struggled to square the circle to make sense of the zeros in the economic stimulus. After unconvincing attempts, there are hints of unused ammunition that can be fired later to counter the trail of destruction that Covid-19 will leave behind. It’s a marathon, not a sprint, as a government adviser reminded — a reassuring message, as long as men and businesses can touch the finishing line with their bodies and souls together.

That story, however, is not finding too many takers. There’s outright disbelief among obvious fault-finders as well as scepticism among admirers. The government’s stance, measures and fears have deepened the doubts. Besides the fiscal orthodoxy, the Centre is caught in its professed preference to ‘endowment’ over the Congress legacy of ‘entitlement’ and doles that the ruling party believes to have kept the poor stay poor. So, it bets on ‘atmanirbharta’ even when the house is on fire.

In politics, as in business, the biggest risk could well be not taking one. Why is GoI so afraid to spend? Bloated fiscal deficit, along with a higher public debt to a shrinking GDP, could trigger a downgrade of the sovereign rating to ‘junk’; since a sovereign (unlike a company) upgrade back to ‘investment’ grade can take a long time, the ‘junk’ tag may stick till the elections in 2024; why subsidise loans and waive interest when benefits could land in the wrong hands; tax relief to a tiny group (which pays income-tax) may politically backfire amid the plight of migrant labourers.

But such risks could pale in comparison with the damages that a prolonged recession would wreck. There are already self-inflicted wounds: the abrupt lockdown and its unplanned lifting; a flawed stimulus; the ‘no free lunch’ comment by GoI’s chief economic adviser; proposing harsh labour laws; the inability to help the urban poor, and disturbing images of families of labourers that remind old-timers of newspaper photographs of refugees after the 1971 Bangladesh War. The sequence of events has a takeaway for the powers that be: while Indians have learnt to live with bumbling, corrupt governments, they may be still unprepared for a government that appears insensitive.

A Scoring Subject Against this backdrop, the upsides of extra spending can outweigh the fears. There is a difference between ‘sovereign rating’, which measures the ability of a sovereign to pay back, and ‘country rating’, which assesses a country’s long-term potential.

Even after a sovereign downgrade — which makes foreign loans expensive and weakens the currency as hot money flows out — the country rating can be preserved if a government pursues reforms, generates demand to pull an economy out of the rut, and generously supports states to gain their trust to push through far-reaching changes in agriculture. That would be atmanirbharta in a wider sense — instead of harbouring an unrealistic expectation that companies with no earnings visibility would borrow even if there’s no demand.

Similarly, a tax cut to 1% people may not be an attractive political option, but it can have a demand spin-off due to the disproportionate share of a small army of taxpayers in the final consumption. None of the criticisms — by the Opposition, hard-nosed analysts or rating agencies — would eventually matter if the economy recovers. That is possible if the government gives growth a chance. But, today, there is a cloud over the stimulus. Check the details, for therein lies the devil.

On Friday, RBI cut rates, a move that will only make it easier for companies that are receiving enough funds to get more money at a cheaper rate. But it didn’t let banks rejig loans without categorising them as non-performing assets (NPAs). In the absence of regulatory forbearance, no bank will restructure loan and add to its NPA that will eat into capital and profits.

A company that receives a new loan will be first asked to repay the earlier loan — leaving very little money for the borrower to grow the business. This brings back the old question: why on earth would a company borrow if demand is missing? That missing piece of demand would fall in place with higher government spending and easier regulations — steps that would prompt banks to lend and businesses to borrow. Else, the central bank would be left to do a bad job of an impossible task.

Fuzzy Signals There are other unanswered questions. How was the Rs 3 lakh crore guarantee for MSME loans calculated? The total Special Mention Accounts SMA0 and SMA1 loan outstanding to MSMEs is estimated at Rs 10 lakh crore. If 20% of that amount is covered by the guarantee, the total guaranteed amount will not exceed Rs 2 lakh crore (assuming all loans turn delinquent and every guarantee is invoked).

Can the guarantees be easily invoked? Will money received by non-banking financial companies (NBFCs) from the special RBI-backed fund be rolled over till the market thaws? The clues to these puzzles lie in New Delhi, not in the money markets of Mumbai. The answers are with the government that should be ready to spend, sooner than later — simply because no political party would like to be remembered as a prisoner of rigid beliefs.